Aussie Billionaire Kerr Neilson’s Bullish Move On Paypal Holdings Inc. (PYPL) And His Other Top Stock Picks

Platinum Asset Management founder Kerr Neilson is widely-known for his value-based, contrarian stock picking approach to investing, and many compare his investment style with the one pursued by Warren Buffett. The Australian billionaire usually goes against the crowd by crafting a long-term view on the market, which is what explains his bullishness on China. “Investing is like passive hunting. It’s great fun! The more you see, the more you think you can see. You build on your past experiences. It’s a cumulative effect. You always want to learn more”, said the hedge fund manager in an interview last year. This way of thinking has surely assisted Neilson in creating and developing one of the top investment management companies in the world. However, the turbulent third quarter put its mark on the U.S-focused equity portfolio managed by the Aussie billionaire, as the market value of this portfolio declined to $3.69 billion from $4.86 billion quarter-over-quarter. It is not necessarily the disappointing equities performance that explains this huge drop, but the turmoil and volatility definitely pushed the hedge fund manager to undergo an extensive rebalancing process. That being said, the following article will discuss Kerr Neilson’s top equity holdings at the end of the third quarter and the performance of the companies in question over the past several months.

Why are we interested in the 13F filings of a select group of hedge funds? We use these filings to determine the top 15 small-cap stocks held by these elite funds based on 16 years of research that showed their top small-cap picks are much more profitable than both their large-cap stocks and the broader market as a whole; yet investors have been stuck (until now) investing in all of a hedge fund’s stocks: the good, the bad, and the ugly. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? These top small-cap stocks beat the S&P 500 Total Return Index by an average of nearly one percentage point per month in our backtests, which were conducted over the period of 1999 to 2012. Even better, since the beginning of forward testing at the end of August 2012, the strategy worked just as our research predicted and then some, outperforming the market every year and returning 102% over the last 38 months, which is more than 53 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).

#5 Paypal Holdings Inc. (NASDAQ:PYPL)

– Shares Owned by Platinum Asset Management (as of September 30): 6.43 Million

– Value of Holding (as of September 30): $199.54 Million

Kerr Neilson’s investment firm added a 6.43 million-share position in Paypal Holdings Inc. (NASDAQ:PYPL) to its portfolio during the third quarter, which accounts for 5.40% of the fund’s equity portfolio as of September 30.  On July 17, PayPal became an independent publicly-traded company after spinning-off from eBay Inc. (NASDAQ:EBAY) through a pro rata distribution of PayPal’s common stock to eBay shareholders. It appears that the digital payment company attracted strong investor interest following its spin-off, as a whopping 87 hedge funds tracked by Insider Monkey owned the stock at the end of the third quarter. The strengthening U.S dollar did not prevent PayPal from delivering a strong financial performance in the third quarter. The company posted net income of $301 million on net revenue of $2.26 billion, compared to $234 million in income on net revenue of $1.98 billion reported for the same period of last year. Activist investor Carl Icahn of Icahn Capital LP acquired a 46.27 million-share stake in Paypal Holdings Inc. (NASDAQ:PYPL) during the September quarter while exiting his eBay position, showing which half of the former mashup he was bullish on.

#4 Baidu Inc. (ADR) (NASDAQ:BIDU)

– Shares Owned by Platinum Asset Management (as of September 30): 1.71 Million

– Value of Holding (as of September 30): $235.28 Million

The multi-billion dollar investment firm increased its exposure to Baidu Inc. (ADR) (NASDAQ:BIDU) during the September quarter by 329,867 shares, ending the three-month period with 1.71 million shares. The shares of the leading provider of online search services in China have fully recovered from the August sell-off, but they are still down by 9% for the year. It is hard to overlook the company’s rich valuation, so Baidu will have to continue delivering strong financials so as to justify its current share price. For instance, the stock is trading at a trailing price-to-earnings ratio of 38.13, which is significantly above the average of 23.12 for the companies included in the S&P 500 Index. Earlier this week, Baidu and China Citic Bank Corp. announced plans to create a bank in order to join the fast-expanding online lending market in China. Aside from Platinum Asset Management, Ricky Sandler’s Eminence Capital represents another top shareholder of Baidu Inc. (ADR) (NASDAQ:BIDU), with 1.76 million shares.

#3 Intel Corporation (NASDAQ:INTC)

– Shares Owned by Platinum Asset Management (as of September 30): 8.14 Million

– Value of Holding (as of September 30): $245.31 Million

It appears that Platinum Asset Management did not make the right move by trimming its stake in Intel Corporation (NASDAQ:INTC) during the third quarter, considering that the shares of the chip giant have gained nearly 15% since the end of September. The Australian investment firm reduced its position in Intel by 3.86 million shares during the turbulent September quarter. Shares of Intel are 4% in the red year-to-date, but they are trading at a tempting trailing P/E ratio of 14.81. Several financial services hubs, including JPM Securities, UBS, and RBC Capital Markets, share bullish views on the chipmaker. Just recently, UBS reiterated its ‘Buy’ rating on the stock and raised its price target on it to $39 from $37, while JPM Securities upgraded Intel to ‘Market Outperform’ from ‘Market Perform’. Ken Fisher’s Fisher Asset Management holds a sizable stake of 19.36 million shares in Intel Corporation (NASDAQ:INTC) as of September 30.

#2 Cisco Systems Inc. (NASDAQ:CSCO)

– Shares Owned by Platinum Asset Management (as of September 30): 9.71 Million

– Value of Holding (as of September 30): $254.76 Million

Kerr Neilson’s Platinum discarded a portion of its position in Cisco Systems Inc. (NASDAQ:CSCO) as well during the latest quarter, reducing it by 751,055 shares. On Friday, the networking giant announced its plans to buy London-based videoconferencing start-up Acano Limited for $700 million. Cisco is constantly seeking out new product opportunities, as the growth of its switching and NGN routing businesses, which make up most of its revenue, has been slowing lately (although the third quarter revenue generated from switching products increased by 4.6% year-over-year). The revenue generated from Cisco’s work collaboration business increased by 17.4% year-over-year in the third quarter, and the company’s management believes that this business unit can keep growing considering that many companies still use outdated conferencing and phone systems. Donald Yacktman’s Yacktman Asset Management held a 36.11 million-share position in Cisco Systems Inc. (NASDAQ:CSCO) at the end of September.

#1 Carnival Corp (NYSE:CCL)

– Shares Owned by Platinum Asset Management (as of September 30): 7.42 Million

– Value of Holding (as of September 30): $368.96 Million

Kerr Neilson cashed out a portion of his stake in Carnival Corp (NYSE:CCL) during the September quarter. Specifically, his Platinum Asset Management reduced its position in the cruise company by 2.06 million shares during the volatile three-month period. Several valuation metrics suggest that now is the opportune time to discard holdings in Carnival, as the company has a trailing P/E ratio of 29.14. However, one should not overlook the earnings growth potential of the cruise company. Carnival’s management anticipates non-GAAP diluted earnings per share of $0.36-to-$0.40 in the fourth quarter, lower than the $1.75 figure registered in the seasonally-high third quarter (the demand for cruises is the highest during the third quarter). Cliff Asness’ AQR Capital Management owns 4.15 million shares of Carnival Corp (NYSE:CCL) as of September 30.

Disclosure: None